converting personal loss to business loss

bought at $1.5M and you think it is worth $1.1M now but the local government won't lower your property tax. They claim it is still $1.5M, or maybe they'll give in and say $1.4M.

The basis for depreciation will be the lower of cost of FMV, and FMV will be what the property tax bill says -- publication 527 says "If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes." So the basis is $1.5M or $1.4M -- although you depreciate only the structure. Then when you sell a year or year and a half later at $1.1M you have a huge business loss that might even generate a NOL.

No. While you are allowed to use the assessed real estate tax values to allocate your cost basis between land and structure, you can't use the real estate tax assessment to establish FMV. You need an appraisal for that.

Ira Smilovitz

The basis for depreciation will be the lower of cost of FMV, and FMV will be what the property tax bill says -- publication 527 says "If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes." So the basis is $1.5M or $1.4M -- although you depreciate only the structure. Then when you sell a year or year and a half later at $1.1M you have a huge business loss that might even generate a NOL.

What if you contest the valuation and they refuse to lower the property value because their appraisers find the value is not really lower?

it. The basis for depreciation will be the lower of cost of FMV, and FMV will be what the property tax bill says -- publication 527 says "If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes." So the basis is $1.5M or $1.4M -- although you depreciate only the structure. Then when you sell a year or year and a half later at $1.1M you have a huge business loss that might even generate a NOL.

because their appraisers find the value is not really lower?

Again, irrelevant. The appraiser for real estate tax valuation is generally under no obligation to appraise at FMV unless local law specifically requires it. Here in NJ, you can't get a tax appraisal adjustment unless you can prove that your property is 15% overvalued compared to comparable property assessments, not compared to current market value.

If you want to use the higher appraisal as your cost basis for depreciation, you have to find an independent real estate appraiser who is willing to state that s/he believes you could get that amount in an arms-length transaction. The tax assessor's valuation won't do.

Ira Smilovitz

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value because their appraisers find the value is not really lower?

under no obligation to appraise at FMV unless local law specifically requires it. Here in NJ, you can't get a tax appraisal adjustment unless you can prove that your property is 15% overvalued compared to comparable property assessments, not compared to current market value.

Here in Chesterfield County, Virginia this year's real estate value for real estate tax purposes is an estimate of last year's average fair market value.

Ira is correct.

Are they required to appraise at FMV in CA because of prop 13 and some other proposition, which states that your property tax is the lower of FMV, or what you paid for it plus plus the 2% a year increase?

Now I'm confused, because it now means that whenever you start a rental, you ought to get the property appraised. I suspect most people are not doing that, nor does the IRS require it. So what can one do in case an appraisal was not done?

Second, if the appraisal comes in lower, the city may still not lower your property tax because they claim similar homes sold for higher. So in effect they are doing an appraisal.

Finally, suppose that you started the rental with the depreciation basis as $500,000. Then suppose that the next year the city lowers your valuation retroactively (thus giving you a refund of your property tax for the previous year) -- this is possible in San Francisco. Or suppose that you find an appraiser who will appraise what the property would have been worth the previous year. Do you now need to file an amended return to revise the depreciation basis?

proposition, which states that your property tax is the lower of FMV, or what you paid for it plus plus the 2% a year increase?

ought to get the property appraised. I suspect most people are not doing that, nor does the IRS require it. So what can one do in case an appraisal was not done?

You only need a fresh appraisal if you want to claim a lower depreciable basis than your adjusted cost basis less land value. Remember, the starting point is lower of adjusted cost basis or FMV, not higher.

property tax because they claim similar homes sold for higher. So in effect they are doing an appraisal.

No, they are doing an assessment, not an appraisal. That's why there doesn't have to be any correlation between the assessed value and the market value. Of course, some jurisdictions require the assessed value to be a true appraisal. Most that I am aware of, do not.

$500,000. Then suppose that the next year the city lowers your valuation retroactively (thus giving you a refund of your property tax for the previous year) -- this is possible in San Francisco. Or suppose that you find an appraiser who will appraise what the property would have been worth the previous year. Do you now need to file an amended return to revise the depreciation basis?

Again, you are mixing tax assessment with property appraisal. The true value of your property cannot change retroactively; it was what it was on a given date. I believe there may be ways to change the depreciable basis of an asset once depreciation begins, but it's not as simple as just filing an amended return and changing the basis.

Ira Smilovitz

In CA they generally assume that the FMV is the price paid. In any case valuation is up to the county assessor's office. The property owner only gets an appraisal if they want to dispute the assessor's value.

A good appraiser can determine the value as of the specific date the property was converted.

Then it can go to court, and the court will decide which valuation is correct.

___ Stu

Ira, almost no one wants to claim a lower depreciable basis. The appraisal may be needed even if the result is acquisition cost is lower than FMV. Otherwise there would be no useful way, upon audit, to refute an IRS assertion that FMV was lower than cost.

I think in a falling market you always want an appraisal because prices are falling. Having an appraisal saves your skin when you sell the house a few years later and have a big loss on form 4797, sales of business/rental property, which is deductible against your regular W-2 income. Of course, if the cost you paid for the house + adjustments - credits is far lower than FMV, like people who bought 20 years ago, then an appraisal is not necessary because the depreciation basis is the lower of cost or FMV, which is clearly cost.